The Sum Of All Eviction Fears


BLOG VIEW: While scanning mortgage headlines the other morning, I was stopped in my tracks by one particularly eye-grabbing claim: ‘Families Exchange Homes to Stop Foreclosure.’

Immediately, I recalled a story that made the rounds last summer. You might remember the one: While cleaning out their home, a family facing foreclosure found a highly valuable Superman comic book – Action Comics No. 1. That comic – apparently a collector's dream item – was later auctioned for $436,000, leading to a bevy of ‘Man Of Steel Saves The Day’ headlines (but, sadly, no ‘Faster than an affidavit notarization, more powerful than a foreclosure locomotive on a dual track’ ledes).

‘But what's all this about swapping homes?’ I asked myself as I dug into the press release.

As it turns out, the release was touting a new (and free) service being offered by an entity known as Home Lease Exchange LLC. In addition to boasting offices in Phoenix and San Jose, Calif., Home Lease Exchange appears to be the creative force behind the – a domain name that doesn't exactly conjure up thoughts of compromise, good-faith negotiating, etc.

Here's how Home Lease Exchange's new service works: A borrower whose foreclosure is drawing near leases – under very generous terms – his or her home to another borrower who (a) lives nearby and (b) is also facing foreclosure. The long-term lease will deter buyers at trustee sales, leaving the servicer and/or bank to deal with the REO and its tenants, Home Lease Exchange explains.

According to the release, this plan ‘creates amazing leverage for homeowners with their lenders, because under President Obama's Helping Families Save Their Homes Act, tenants have the right to stay in their homes through the term of their lease, as long as the lease is entered into before complete title to the property is transferred.’

The Helping Families Save Their Homes Act, which passed in May 2009, included the Protecting Tenants at Foreclosure Act (PTFA). Created in response to the rare but nonetheless unfair situation where a tenant is kicked out of his home on little notice because his landlord stopped paying the mortgage, the PTFA was designed to give tenants some breathing room between learning of his landlord's foreclosure and securing new living accommodations. Under the PTFA, servicers must abide by the terms of bona-fide leases or, where no such lease exists, provide a 90-day grace period for tenants.

The PTFA was immediately met by trepidation on the part of servicers and eviction specialists. Giving servicers cause for concern were the legislation's vague language, questionable cutoff points and definition of bona-fide leases.

For months following the PTFA's passage, eviction-themed webinars and industry panel sessions dealt with worst-case scenarios, such as the dreaded 10-year verbal lease entered into between a borrower and his brother. The PTFA, well-intentioned though it was, clearly put servicers in a precarious spot.

Making things more difficult was a PTFA amendment included in this year's financial reform legislation that essentially allows borrowers and tenants to enter into leases up until the point at which complete title to a property is transferred to a successor entity.

‘Therefore, the Dodd-Frank Act opens the door wider than before to potential fraudulent leases or tenancies, under which straw-man tenants or others are used as a strategy to significantly delay the REO owner from recovering possession of the property,’ Larry R, Rothenberg, a partner at Weltman, Weinberg & Reis Co. LPA, wrote at the time. ‘'Strategic renting may now join 'strategic default' as a term in our lexicon.’

Perhaps to the surprise of much of the industry, abuse of the PTFA has been limited to one-off events, eviction attorneys told me as recently as last week. Yes, suspicious leases come up now and then, they say, but by and large, the issue of fraudulent leases hasn't been nearly as bad as was originally feared.

Will Home Lease Exchange be the galvanizing force that turns eviction departments on their heads?

– John Clapp, editor, Servicing Management

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